- This topic has 5 replies, 2 voices, and was last updated 6 years ago by
.
- Posts
Dear Mr John,
Cost-based approaches to transfer pricing are often used in practice, because in practice the following conditions are common.
a) There is no external market for the product that is being transferred.
b) Alternatively, although there is an external market, it is an imperfect one because the market price is affected by such factors as the amount that the company setting the transfer price supplies to it, or because there is only limited external demand.I don’t understand condition b) above, please help to explain conditions of imperfect external market.
Thank you very much.
Warmest regards,
Eric LamYou cannot learn ‘conditions of imperfect market’ and you are not expected to. This is a clever question that tests your understanding of transfer pricing, and of pricing in general.
I assume you have watched my free lectures on both of these?
With transfer pricing, we use whatever external selling price is given in the question. However we do not take account of the fact that the external price might change if we are selling more or less externally. (If we sell less, then other suppliers might put up their prices because there is less available for the purchasers.)
On the other hand, if there is only limited external demand, then if we don’t supply other suppliers might again change their prices. Again, we take no account of this in the way we calculate transfer prices.
Dear Mr John,
Thank you for your excellent explanation.
In that case, what are the perfect market conditions? Please advice.
Thank you very much.
Warmest regards,
Eric LamIn the case of transfer pricing it is where the external selling price will not change with the number of units that we sell externally.
- The topic ‘Imperfect external market’ is closed to new replies.